Conditional lending, while perhaps overlooked during commercial and personal loans, forms the bedrock of such delicate transactions, and so should the borrower find themselves unable to apply the funds as expected, the nature of the agreement remains lawfully intact in favour of the lender.
In this matter, an insolvent debtor’s bank attempted to convert such monies into company assets at the expense of the lender, at which point the reassurance of equity intervened.
In 1964, the shareholders of a relatively successful enterprise took steps to issue dividends of around £210,000; however, upon inspection they discovered that without adequate liquidity, the payment would be impossible.
With that in mind, the company owner secured a conditional loan from the respondents, on the express condition that the funds were to be used for dividend issue only.
Once received, the owner wrote to the company bank, giving instruction to open a standalone account for the retention of the funds, while stipulating that:
“We would like to confirm the agreement reached with you this morning that this amount will only be used to meet the dividend due on July 24, 1964.”
Unfortunately, on July 17th 1964, the company entered into voluntary liquidation, whereupon the monies held remained unused, as per the instructions given at the point of receipt.
Some time later, the respondents demanded repayment of the money loaned; after which, the appellant bank argued that it had since become a corporate asset, and was therefore subject to the priorities of all associated creditors involved in the bankruptcy process.
At the point of litigation, the respondents held that the money loaned was subject to a resulting trust, and that the bank by virtue of their position, were now under a fiduciary liability as constructive trustees for the amount loaned.
In the first hearing, the judge awarded in favour of the appellants, on grounds that equitable principles did not apply when arms-length dealings fail.
Whereupon, the respondents appealed and the Court held that in matters involving third parties to a failed transaction, recovery under equity was a principle long enjoyed, and routinely evidenced through a number of judgments across hundreds of years.
Presented again to the House of Lords, the House examined the complexity of the transaction and noted that in Toovey v Milne, Abbot CJ had ruled that failure to apply the money loaned in the way originally intended, allowed for recovery of the funds during insolvency, under the principle that:
“[T]his money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid.”Toovey v Milne
Here again, reference was made to the express conditions applied to the loan, as well as the statement made in the letter at the time the money was passed to the appellant bank.
It was further noted that while in circumstances where the lender agrees to loan on non-specific terms, there is an implied assumption that such funds become part of the corporate estate (albeit not entirely free of equity).
However, on this occasion there was ample testimony that the respondents had bargained with the borrowers on clear conditions, therefore the House uniformly and unreservedly held that the Appeal Court decision was to remain untouched and the bank’s appeal dismissed, while the House reminded the parties that:
“[T]he law does not permit an arrangement ” to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender.”